Raising Startup Money Through a Public Shell Company

Question: While searching for seed money I’ve been approached a few times with the idea of a reverse merger where my company is rolled into a publicly held shell company. To raise money the shell company would then do a roadshow to sell stock. SEC and SOX requirements aside (which is scary enough), this seems risky and a little in the grey area. Am I just too cautious?

Our Take: If you are too cautious, then we must be as well, because this doesn’t like a great idea. From time to time, we’ve had companies in our portfolio be approached by folks who want to roll them up into a shell, etc. It sounds like a ton of work and if you can’t get funded by a VC, it seems implausible that you can get funded by the public markets.

Bottom line, your instincts are the same as ours.  The folks we’ve met in this business seem a little too “salesy” for our tastes.

  • It worked OK for one of our portfolio companies to reverse into a cash shell, and I’m not sure it was really any harder than doing a fresh float- mind you this was on AIM.

  • You might be interested to know that reverse shell mergers have now become the defacto IPO for emerging growth companies. They outpaced the number of IPO’s performed (197) in 2006. The average valuation of a PIPE funded reverse shell merger exceeds $50 million. The prices of shells are now between $600K to $1 million so the barrier of entry has eliminated the promoters of yesteryear.
    The quality of companies backing into shells are getting stronger and there is an infux of Asian companies seeking to go public through a reverse merger.
    Deal Flow Media sponsors a PIPE’s conference in NY each year at the Waldorf Astoria and in 2006 over 800 investment bankers, attorneys, accountants and hedge fund managers paid $800 a person to attend.
    Lets just say that a new industry has been born to replace what used to be the small cap IPO marketplace.